Six Reasons Why Incumbent Firms Fail to Innovate
One of the empirical facts of business strategy is that “big” innovations that create new categories or subcategories do not come from the leading incumbents – they come from outsiders. Successful incumbents have the resources to lead but, in fact, success breeds complacency, lethargy or arrogance. What is also disturbingly true is that incumbents not only fail to innovate, but also fail to be relevant to major innovations of others and sometimes lose not only their momentum but their very existence as a player.
In a brilliant new book, Unrelenting Innovation: How to Build a Culture for Market Dominance, Gerry Tellis explains why this is. His answer, based on nearly a dozen major clinical studies conducted by he and his colleagues, is that it is the culture of the incumbent firm that is inhibiting the firm from innovating or even responding to innovation. He identifies three cultural traits and three practices that inhibit incumbents from “big” innovation, which is the only route to real growth as I argue in my book, Brand Relevance: Making Competitors Irrelevant. Understanding these traits and practices is the key to creating a culture where “big” innovations can be nourished.
Refusal to cannibalize one’s own successful products. Firms want to protect their golden goose and certainly not kill it. Kodak had many of the patents that were the basis for digital photography, but they were protective of its film business. Microsoft had a model for paid search before Google, but was afraid it will kill the banner ad business of MSN. Sony came out with an MP3 player two years before Apple, but Sony Music was petrified that a successful MP3 player might foster music piracy. Compare these examples with Gillette’s willingness to again and again obsolete successful products.
Reluctance to take risks. Failure is endemic to innovation, with rates ranging from 50% to 90% at various stages of development and commercialization. And executives rarely get blamed for missing a major innovation, but having one fail is often a career buster. The safe course is to avoid risky initiatives and stick to incremental innovations on the existing businesses. But big payoffs require big risks. Toyota gambled with the Prius with respect to undeveloped technology and an uncertain demand. Both Amazon and Federal Express took a big risk in sacrificing profits with a big bet that scale would pay off.
Inability to focus on the future. In has been shown in one of Tellis’ studies that major innovations go through stages. The first, a flat stage while the innovation is being improved and getting market traction, can be lengthy. Firms tend to accept this first stage data as predictive and fail to analyze the potential technology or distribution developments that may ensue and lead to the second, take off phase. As a result they fail to invest or even stop an innovation that is in the marketplace. For example, Blackberry had a smartphone prior to the iPhone and HP had an e-reader before the Kindle or the iPad, but the potential of each, based on the existing market, seemed too weak to merit investment. Apple, of course, proved them wrong.
In addition, incumbent firms lack three practices that promote the traits that engender innovation: providing incentives for “big” innovation, fostering innovation competition and empowering innovation champions.
Incentives work. In successful, dominant firms incentives are often set to current sales or satisfaction of current customers and are even biased toward employee seniority or loyalty. Innovation, when it is evaluated, has a heavier weight on failure than success, which can take years to determine. Google is the model for getting innovation incentives right. Employees are expected to spend 20% of their time on innovation, a “license to pursue dreams.” The Founder’s Awards, which run into millions, recognize employee innovations. There are the innovation reviews whereby employees can present new product ideas to Google top management, including the CEO. And there’s more.
Lack of internal competition for innovative ideas. As a result, innovation is stifled. Silicon Valley is successful in part because of the frenzy of competition for ideas and people. The firms that keep coming up with “big” innovations have found ways to create such energy inside a firm. For over a decade, HP supported inkjet and laser technologies with competing printing divisions within the company. Each division worked hard to outdo the other, and innovation was the beneficiary. Some firms have idea fairs, research contests, competition for internal startup funding or autonomous innovation units. The idea is to find and nourish embryonic business ideas that can be a growth platform for the future.
Lack of support for innovation champions. Firms like Apple that have been serially successful at innovation empower innovation champions, or individuals within the firm that are charged to develop major innovations and are provided with a team and resources. Successful innovation champions have a vision for the future mass market, tend to be mavericks and dissenters, have the conviction to persist against heavy odds and are willing to take risks. Such people are rare and need to be attracted, cultivated, supported and rewarded. Not easy for most organizations.
I believe this book will make an important contribution to the strategy literature. With a logical framework and a fact-based, research-based foundation, it addresses one of the most important challenges of the day: How do you foster “big” innovation within the context of a firm that has successful business units? Executives of established firms should read it and consider applying the ideas immediately.
Every firm should have some “big” innovation ideas within a balanced portfolio of innovation initiatives, and this book will help get you there.